What are Central Digital Bank Currencies?
For the past decade, cryptocurrencies have become a more important part of our monetary system. In the past couple of years, central banks have begun to take notice. Now, we are seeing the right of what are known as Central Digital Bank Currencies. So what exactly are these CBDC and what do they mean for you?
What are central digital bank currencies?
Central digital bank currencies of CBDC are a digital record or electronic token that is designed to represent a fiat currency that is issued by a central bank. A CBDC has the same value as its fiat currency counterpart.
What are the differences between a CDBC and a decentralized cryptocurrency?
There are a number of critical differences between a CDBC and a decentralized cryptocurrency such as Bitcoin or Ethereum. Perhaps the biggest difference between these two types of crypto is that a CDBC is issued and controlled by a central bank while a decentralized cryptocurrency is designed to be stateless and not under control by a direct authority.
Are CDBCs a threat to crypto such as Bitcoin?
Some people may think that a central bank issued crypto token will be able to detrone or replace Bitcoin or Ethereum. However, it is likely that both central and decentralized crypto coins and tokens will live side by side. That’s because decentralized currencies are speculated to become a store of wealth while CDBCs will be valued as a stable cryptocurrency that can be used for everyday transactions.
Will CDBCs be a threat to stablecoins?
Stablecoins are cryptocurrencies that are pegged to a fiat currency such as the US dollar. Stablecoins like USDT may be threatened by CDBCs because state issued cryptocurrency will be seen as a more legitimate alternative to stablecoins which have had their own issues of trust.
CDBCs will not lead to a “shut down” of decentralized cryptocurrency
Decentralized crypto such as Bitcoin can’t really be “shut down” by a government. The recent Bitcoin miner crackdown in China is a great example of this. When China banned Bitcoin mining in their country, the miners simply closed up shop in China and moved to other countries - such as the United States - to continue their mining operations.
CDBCs will not solve the devaluation problem of central bank issued currency
Also consider the fact that CDBC does not solve the problem that is inherent in all fiat currency. You see, a CDBC issued by the United States, for instance, will still continue to lose long term purchasing power because there is nothing to stop the central bank from issuing a limitless amount of tokens. On the other hand, Bitcoin as well as other cryptocurrencies, have a fixed supply which is likely to make these decentralized cryptocurrencies more valuable over time.
Will CDBCs be a part of your life soon?
There is a good chance that a CDBC can become a part of your everyday spending soon. That’s because it is simply easier for a government to issue citizens digital currency rather than go through the process of printing and circulating coins and paper currency.
Getting ready for a new stage in cryptocurrency innovation
As the world continues to adapt to crypto, it is not surprising that central banks are finally starting to embrace the concept of a digital currency. There is a good chance that you will have both decentralized and central bank tokens in your digital wallet soon.
REFERENCE:
https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp
https://www.bis.org/publ/work905.htm
